All men’s miseries derive from not being able to sit in a quiet room alone. – Blaise Pascal

Posted by: donmihaihai | June 21, 2008

Looking at the oil wells.

It is not just the topic of the day but the topic of the day for a long time with the price of crude oil moving higher and higher, way above USD$100 to the range of USD$125 to USD$140. Every concern people will want to look behind the door of the crude oil price, trying in whatever ways to know what is actually happening. For me, besides having more facts popping up here and there, this topic is getting increasing boring with increasing boring commentaries. Still, a discussion and news fuelled by interests in this topic again. I re-read “Twilight in the Desert” By Mathew R. Simmons and gather more materials strongly reinforce my views that peak oil is not some distant story.

Talk about the news 1st and rather than looking into the crude oil price by crude oil price which is usually the standard approach couple with geopolitical tension, inventories, economy and speculation. There was a small paragraph in main stream newspaper recently said, Mexico’s Cantarell oil field production is declining at a rapid rate of double digit in 2007 and Jan 2008. Giant oil field Cantarell had reached peaked production and in decline is not new but a decline rate of double digit, 15% to 18% from various news is alarming(even with the steep projected decline by Pemex earlier on).

Cantarell was producing 1.243 million barrels per day(bpd) in Jan 2008, decline from 2.1 million bpd in 2004, with a depletion rate of 15% to 18% and is projected to produce 1 million bpd in 2008. Rounding the number, the world crude oil supply is losing 1 million bpd from Cantarell. So what is the big deal if Cantarell is supplying 1 million bpd lesser. Well let take a look at how significant or insignificant a million barrels per day.

1) World demand stands at 87 million bpd currently(if I remember correctly). 1 million bpd = 1.1% of world demand.

2) Conventional oil production stands at 74 million bpd currently. 1 million bpd = 1.4% of all conventional oil production.

3) Malaysia is an oil exporting county with a daily production of 700,000 bpd. A decline of 1 million from Cantarell is > all crude produce by all oil fields in Malaysia. This is getting interesting.

4) The decline of 1 million bpd from the peak is offsetting all the gain from other oil fields in Mexico that Mexican monthly production slump from about 3.9 million bpd in Sep 2004 to just over 3.1 million bpd.

5) The last giant oil field that has a daily production of > 1 million bpd is none other than Cantarell.

6) Currently there are only 4 giant oil fields in the world that have production of > 1 million bpd. Ghawar of Saudi Arabia, Burgan of Kuwait, Daqing of China and Cantarell of Mexico. While no data is known how much Ghawar is producing(estimated 4.5 million bpd) and whether Ghawar has reached it peak production, Burgan and Daqing are in the same situation like Cantarell, declining after peak, at a slower rate. It is likely that Daqing and Cantarell are going to produce <1 million bpd is near future, perhaps in 2008 or 2009.

Beside Ghawar, Burgan, Daqing and Cantarell that able to produce >1 million bpd. In the history of crude oil, only a handful of giant oil fields that had reached this super-giant status. Those that I know of are, Kirkuk of Iraq, discovered in 1927, peak production was 1.5 million bpd. Rumailia North of Iraq, discovered in 1958, peak production was 1.2 million bpd. Prudhoe Bay from USA, discovered in 1968, peak production was 1.6 million bpd n 1987, Romashkino of Russia, peak production of 1.6 million bpd in 1970s, Samotlor from Russia, discovered in 1961, peak production of 3 million bpd in late 1970s or early 1980s. Abqaiq of Saudi Arabia, discovered in 1940, peak production of 1 million bpd in 1973. Safaniya of Saudi Arabia, discovered in 1951, peak production of 1.5 million bpd in 1980.

While I do not have the whole list of giant oil field producing >1 million bpd, I do not expect that there are a lot more which I don’t know of.

7) Let kill some hope and optimism on the current and future hope of crude oil production, which is the deepwater oil field that trigger the bloom of rig and offshore vessel, especially so after the discovery of 3 huge oil fields in the deepwater offshore of Brazil.

Current largest deepwater offshore oil field should have peak production of 0.25 million bpd to 0.3 million bpd. It will take 4 of them to replace the decline of 1 million bpd from Cantarell.

Running on a treadmill

If deepwater is the future, then we are running on a treadmill, running faster and faster but still at the same position, or moving backward. Why? Let expand from on just one giant oil field, Cantarell to a whole list of 14 giant oil fields that produce over 20% of the world supply. Data represented in year 2000 and unlikely to change in term of which field because in the area of giant oil fields, there are almost no new comer except that the current fields are getting older.

What is happening to the 20% of world supply? Every single one is an old oil field with the youngest at 23 yrs old. Of these 14 giant oil fields, 9(I am not sure about the other 5 but I won’t be surprise that all 14 are already in decline due to the age) already reached peak production and in decline.

When the global crude oil supply is depending on a handful of mature giant oil fields with declining production, what should the price of crude oil be? I don’t know at what price, but there is only one word — high.

The 3 oil fields with huge reserves discovered recently in the deepwater of Brazil may be huge, but it is unlikely and unknown at this moment that individually, they are able to has a production of at least 0.5 million bpd and it won’t be cheap. What more, high rate of production is not known to be sustainable in deepwater field and a decline rate of 20% to 25% per annual is not unusual.

Demand does not back off.

The current view is that as the world economy slow or even going into recession, the demand of crude oil will slow, level off or even back off and that will push the price of oil down. Is it so? I don’t know. But let look at 1970s, a period of oil bubble and stagflation, it show a different picture.

In 1960, global oil demand was = 20 million bpd

in 1970, global oil demand was approach 50 million bpd

Global oil demand jumped above 60 million bpd in somewhere 1979 before decline to almost 55 million bpd at around 1983 before moving upward again.

If we remove the last spike from USD$18 in 1978 to USD$40 in 1980 due to geopolitical and Iran crisis couple with decrease in demand from 60 million bpd to almost 55 million bpd, those increase in demand happened in the period of crude oil price that increased from just over USD$1 in 1970 to the range of USD$12 to USD$18 in 1978. Demand increased despite crude oil price increased by more than 10 fold in a period of stagflation. Don’t tell me that crude oil price was too cheap before the 1970s and the increased in price is not comparable to the current situation. Currently the increase is still less than 10 fold in the range of 8 to 10 X. Which one is having more impact? I don’t know but I am bias and in view that the impact of 1970s was greater than the current situation.

While there are articles in newspaper showing how car drivers are handling high oil price(Don’t expect featuring fast car driver when they are on the subject of conversation and drive less), I rather look at what happening around me and my friends in a rich country like Singapore.

Traffic Jams are going from sane to crazy in last 3 years. If there is a decrease, I don’t know. Parent are sending their kid to school in their car at a increasing rate or Secondary school student are taking taxi in an increasing rate as well. An increasing number of new parents(my friends) are buying cars because it is unthinkable for them not to move around with their lovely only baby without a car. Yes, we are rich and current oil price does not seem to be changing our habit yet.

Geopolitical

Geopolitical keep popping up and being blame as one factor in the increasing crude oil price. But 1st let face it, with the concentration of oil supply in places of instability, what can we expect? While there seem to be a huge increment recently, this is also because supply is increasing concentrate from a few sources.

In fact, I think the current situation is much better and stable than 1970s. Let look at 3 of the majors.

2) Iran crisis from 1978 where about 5 million bpd were removed from supply which cause the last spike. 5 million bpd is almost 9% of the global crude supply at that time.

3) Middle East oil miracle was started because of Multi national oil companies from US and Europe going in. By the beginning of 1980s, most of them are being kick out of Middle East. Saudi Aramco, the company that control all Saudi Arabia crude oil production was handover from 4 US oil companies, origin from Standard Oil to the hand of Saudi Arabia.

The current geopolitical seem to be “kid plays” as compare to 1970s.

Margin of safety

The concept margin of safety in investing is very useful here. And it can be as good as saying if there are no margin of safety in the supply of crude oil, don’t expect low oil price. The concept work in the same way as Charlie Munger said, in engineering, a bridge able to hold 15,000 tones will be build if it is expected to hold maximum of 12,000 tones at a time. Or just like the available of backup mike immediately when the mike he was using went off in the 2008 annual meeting. How can we expect low crude oil price in a time where there are no ample spare capabilities, i.e. margin of safety.

Net-Net we gain after peak oil

Where the idea of peak oil is painful and not going to happen now for many peoples. I think, net-net, after that a long period of pain, we are being even better off as human does not depend on a finite resources for energy anymore. And if human can really find a new energy source that is infinite, won’t the price of keep going downward as long as it is earnings a decent return for the supply of these new energy source.

But before that, let feel the pain 1st and that future may not happen in my life time.